Tone-Deaf on Inflation: Elites, Deficit Spending and Climate Change


PREMO Member
While it seems clear that the Davos crowd and those who attend other self-aggrandizing conferences in places like Glasgow view climate change as an existential threat that must be dealt with immediately regardless of the costs of their plans, everyday people don’t seem to be so sure. According to a Gallup Poll conducted ahead of last year’s elections, the issue of climate change was ranked second to last among 16 issues deemed very important or extremely important when voting for President in 2020. Despite this inconvenient truth, the political elite seems insistent on reordering the global economy and risking the prospects of structurally high inflation to fix a problem that they apparently believe their constituents are either too dumb or too uninformed to understand.

What is important for those of us who ply our trade in the financial markets is how committed politicians are to policies that appear to be creating a shortage of fossil fuels and greater-than-usual demand for industrial commodities like copper, lithium, cobalt, and manganese. Year-to-date, this has translated into exceptional performance for both the commodities and the stocks. The S&P Energy sector has greatly outperformed the broader Index, up + 50% this year, while the S&P Materials sector, up +21%, has provided returns close to the broader market in a very strong year. Given the commitment of the new Administration to render such industries superfluous, there is, of course, a certain irony in this.

President Trump loved the energy sector and stated publicly at the start of his Administration that he wanted the U.S. to be a net exporter of fossil fuels. Sadly for investors in the sector, the Administration fed into the worst instincts of those who run energy companies from a capital allocation perspective. Returns reflected this lack of discipline. This was good for society but for the stocks. President Biden, on the other hand, immediately ordered a pause on all oil and gas leasing on federal lands and killed the Keystone pipeline. Energy stocks have never looked back but the average consumer was ill-prepared for an increase in prices at the pump.